Retail Sales Jump in May, Brighten Growth Outlook

WASHINGTON -- U.S. retail sales surged in May as households boosted purchases of automobiles and a range of other goods even as they paid a bit more for gasoline, the latest sign economic growth is finally gathering steam.

While other data Thursday showed a slight increase in new applications for unemployment benefits, the number remained in territory associated with a tightening labor market. The signs of a firming economy could likely prompt the Federal Reserve to raise interest rates in September.

"Today's data, including the trend-like jobless claims number, keep September firmly in place as a credible option for the Fed," said Anthony Karydakis, chief economic strategist at Miller Tabak in New York.

Retail sales increased 1.2 percent last month after an upwardly revised 0.2 percent gain in April, the Commerce Department said. April sales were previously reported to have been unchanged. March sales were also revised to show them rising 1.5 percent instead of 1.1 percent.

The dollar rallied against a basket of currencies on the retail sales data. Prices for U.S. government debt rose as lower European borrowing costs renewed appetite for Treasuries. U.S. stocks were trading higher.

The U.S. central bank has kept its short-term interest rate near zero since December 2008. Solid retail sales data added to robust job growth in May and stabilizing manufacturing activity in suggesting the economy was finding momentum after getting off to a slow start in the second quarter.

These so-called core retail sales correspond most closely with the consumer spending component of gross domestic product. Economists had forecast core retail sales rising 0.5 percent after they were previously reported to have been flat in April.

March core retail sales were also revised up to show them increasing 0.9 percent instead of 0.5 percent.

Growth Picture Brightens

The government's most recent growth estimate showed gross domestic product contracted at a 0.7 percent annual pace in the first quarter.

But revisions to March core retail sales together with upbeat data on healthcare spending, as well as already reported revisions to construction spending, trade and wholesale inventory data suggest that output was probably not that weak.

"It is now possible that GDP didn't actually contract in the first quarter," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

Second-quarter GDP growth expectations were also boosted by a second report from the Commerce Department showing retail inventories, excluding autos, in April recorded their biggest increase since November 2013.

Consumer spending is likely to remain fairly strong in the coming months, supported by high savings, rising house prices and a tightening labor market, economists say.

%VIRTUAL-pullquote-We continue to expect robust consumption growth for the remainder of the year.%In a separate report, the Labor Department said initial claims for state unemployment benefits increased 2,000 to a seasonally adjusted 279,000 for the week ended June 6.

It was the 14th straight week that claims held below the 300,000 threshold, which is usually associated with a firming labor market. The government reported last week that 280,000 jobs were created in May, up from 221,000 in April.

"We continue to expect robust consumption growth for the remainder of the year," said Laura Rosner, an economist at BNP Paribas in New York.

Last month, overall retail sales were buoyed by a 2 percent jump in receipts at auto dealerships.

The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.

The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.

The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.

The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.

Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.

Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.

The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.

Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.